Per Yahoo finance: The auction of $27 billion of 7-year notes completed this week's sales of Treasury coupons, with all three auctions seeing solid demand. Solid demand huh? But when you check to see how many of those bonds were bought by foreign governments, the number is shocking. 2yr 68% 5yr 63% 7yr 67% So the foriegn governments are buying 2/3rd of our treasuries...Is it because they think interest rates of 1-3% are good returns(even though inflation is historically much higher than this? Do they think their own governments currency is going to drop against the dollar soon? Or are they so scared that the dollar will collapse, they are throwing money at us to keep us propped up until this crisis clears up?
Other. It's because the G20 is engaged in a coordinated liquidity program. The excess liquidity that is not being used has to be parked somewhere. Therefore, many foreign central banks, and commercial banks are parking their excess reserves in US treasuries. Think about the 600 billion in Euro loans that the ECB just announced. That excess liquidity cannot be pumped into the economy overnight, so some of it is parked in treasuries. This is why we are seeing huge demand in the treasury market this week. The ECB is coordinating with the Federal Reserve to accomodate the extra borrowing by governments.
But june 24, 2009 Lorenzo Bini Smaghi, Member of the Executive Board of the ECB in part of his speech he was addressing deflation in the Euro. Here is part of what he said "As the chart (slide 2) indicates, euro area inflation - measured in terms of rate of change of the price level over the previous 12 months - has declined sharply from a peak of 4% in July of last year to 0% in May, the lowest rate since the beginning of Monetary Union. It is widely expected to dip into negative territory this month and is likely to remain there for most of the summer" So ask yourself...why would the ECB holding a deflationary currency, put their money into a currency that is inflating? They must understand that they will lose billions by doing this. I mean this makes no sense. Its like saying "hey, i think gold is going to go up this summer, let me trade it in for zimbabwe dollars instead" (ok I went a little extreme in that example) but you see what i mean? I mean, why would you want to park your money in T-bonds whos interest rates can only go up thereby pushing the value of the bonds down making resale impossible unless they want to lose even more money. Why wouldnt you just hold that money in your own currency? Do you see the fishyness going on there?
The central bank market is not one of investment, it's one of fund flows. Their actions are to create a liquid interbank market. Therefore, they do not look at buying treasuries in the same way a hedge fund does. Secondly, they buy US treasuries, and the dollar, to keep the Euro from appreciating too much, just like the Chinese and most other countries do. Worldwide, central banks try to keep their currencies from strengthening too much against the dollar, so they can have competitive exports. That's why as dollar liquidity has been flooding world markets, you see a lot of emerging market dollar reserves increasing, they buy dollars, to hold their currency down.
gov is fudging(?) numbers----what's new! --------------------------------------------------- WSJ: Is Foreign Demand for US Treasuries as Solid as it Looks? Posted by TraderMark at 11:15 AM TweetThis I found this little tidbit in the Wall Street Journal and it really shows (again) it is just business as usual, in all branches. One of the big stresses in the market has been the enormous glut of US debt coming (both new and rollover). In the past week alone the Treasury put on the market a staggering $104B of debt. Sit back and think about that for a moment... then annualize it ($104B x 52 weeks). Then sigh. But I digress! Money is free in America as it grows on trees. Going back to the earlier point, the stress is eventually our foreign owners, err creditors will (a) demand much higher rates of return i.e. higher yields - to compensate for all the debt we are issuing and the long term risks it entails or (b) they will begin walking away. This is more an issue in the long term bonds (10 year or 30 year) rather than short term. Indeed China for example has been slowly moving their purchases away from the long term and into short term - much easier to walk away from when the day eventually comes. [May 21, 2009: NYT - Chinese Becoming More Picky About Debt] Without getting technical, in the bond market there are direct and indirect purchases... indirect being foreign issuers. From the Federal Reserve's New York branch website Purchases by indirect bidders, in particular, are a fairly good proxy for foreign purchases of Treasury notes, but not Treasury bills. For those that don't know, "notes" are generally 2 years of duration or longer. "Bills" are the very short term things like 3 months, etc. Long story short people will now obsess over the INDIRECT purchases of our longer term notes. This is expressed as a percentage; the higher the better in terms of "demand" from foreign central banks. We've recently had some long term auctions that went reasonably well, and the indirect purchases allayed some fears. Cool right? Err... fine print time. Follow as with all government reports - when the data begins to work against you, start to make adjustments. Banana Republic style... because folks, we can't handle the truth. We've done it for inflation, employment, GDP - we've lose entire reports like M3 (money supply)... its a pattern. As for this one? Another feather in the cap for Uncle Timmy G. The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems. When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit. But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners. Boo Yah! If you don't like the results; change the parameters! We've been doing it for 25 years, why change now? The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher. Getting a better sense of investors' appetite, especially overseas, is imperative to the U.S. at this time when it needs to sell record amounts of debt in order to tackle surging budget deficits and fund massive stimulus programs to revive the economy. So what does Treasury have to say for themselves? Treasury officials didn't respond to requests for comment. http://www.fundmymutualfund.com/2009/06/wsj-is-foreign-demand-for-us-treasuries.html